Market Needs 2 of These 3 Things For A Sustained Bounce

Posted 9:30 AM ET - The market cares about three things and it will not rally until we get positive developments from at least two of them. Solid earnings are not attracting buyers and the S&P 500 is going to test the lows from Wednesday. The next support level is SPY $257.50 and it was tested in February and March. The year-end bounce will depend on how these three issues are resolved. The easiest hurdle is Fed speak. We need to hear a softer tone and the rate hike in December needs to be postponed. Hawkish Fed comments Wednesday did not help, but there are many other officials who will voice their opinions. Dovish Fed comments could happen immediately and they will have an instant impact. The second hurdle is a bit more difficult. According to the betting lines Republicans have a 75% chance of retaining control of the Senate and those odds are improving. They also need to retain control of the House and there is only a 35% chance that they will do that. Trump's agenda has been market friendly and it will only continue unimpeded if Republicans win the House. Polls have been tightening and anything is possible. We will know this outcome in 10 days and this result would spark buying. The last hurdle is a deal with China or Europe. China won’t happen because Xi and Trump want to prove who has the upper hand. A G20 meeting at the conference on November 28th is likely, but uncertain. Nothing will happen until then and it is a month away. If talks restart, a deal will take months. Europe can't find a Brexit solution after three years. They also have a member (Italy) who plans to run a huge deficit next year (2.4% of GDP). The EU rejected the budget, but this will pave the way for others to push the limit. Trump will get impatient and he will set a deadline for Europe. A trade deal with either partner would spark a massive rally, but it's not going to happen for at least a few months. Immigrant caravans are pushing through Mexico with little resistance. Trump said that a trade deal could be in jeopardy if Mexico does not stop the caravan. Domestic economic conditions are strong and preliminary GDP for Q3 came in at a robust 3.5%. This is in line with expectations. Unfortunately, global flash PMI's were soft this week and other major economies are struggling. Earnings have been good and stocks are reacting negatively. At a forward P/E of 15, stocks are reasonably priced. This was the climax of earnings season and profits are not exciting buyers. The technical damage in the last week has been severe and the S&P 500 is down 10% from the high (correction). Asset Managers are in risk off mode and fundamentals no longer matter. Without question margin calls and liquidations are putting downward pressure on the market. On a short-term basis we could still probe deeper. There are plenty of bargains and the baby has been thrown out with the bathwater. Swing traders should maintain an intraday stop at SPY $264. If we are shaken out of our position, place an intraday buy stop at SPY $268 so that we can catch it on the way up. If the Fed softens its tone and Republicans maintain control of Congress we will see a nice year-end bounce. Until we have a trade deal with Europe or China, it will only be a bounce (no new high). Day traders should let the early selling run its course. Look for support at Wednesday's low. If the market finds support above that level it would be a bullish sign. I will be trading from the long side if the market can get above the first hour high. I will be favoring the short side if we see a steady drift lower. Expect choppy trading until the elections. . .

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